Inflation Indexed Bonds Performance-
U.S. Treasury Inflation indexed bonds are supposed to protect you from the ravages of inflation while providing a safe and decent rate of return on your money. Obviously, since safety is generally inversely proportional to risk, if inflation indexed bonds are very safe you would expect the rate of return to be relatively low but at least above the rate of inflation. See: Worried About Inflation – Consider Inflation Indexed Bonds for more information about Inflation Indexed Bonds aka. i-Bonds.
In this article we will look at how well Inflation Indexed Bonds have actually performed compared to inflation since they were first introduced in 1998.
But first we have to understand how to calculate the rate of return on an Inflation Indexed Bond.
How to Calculate the Rate of Return on an Inflation Indexed Bond
Inflation Indexed Bonds have two components to their yield, a fixed portion and a variable portion. The variable portion is based on the average inflation rate over the previous six months and it is adjusted twice yearly in May and November. So i-bonds purchased over the following six months are based on the inflation rate for the previous period.
As of November 2012 the fixed portion is 0% and the variable portion (for 6 months) is 0.88%
The formula for calculating i-Bond returns is as follows:
Composite rate = [Fixed rate + (2 x Semiannual inflation rate) + (Fixed rate x Semiannual inflation rate)]
So the current rate of return is:
Composite rate = [0.0000 + (2 x 0.0088) + (0.0000 x 0.0088)]
or
Composite rate = [0.0000 + 0.0176 + 0.0000000] = 0.0176 = 1.76%
So lets look at how Inflation Indexed Bonds have performed. To do that we have calculated the semi-annual inflation adjustment for each period and the associated fixed rate to find the total return for the bond. Then we calculated the actual inflation rate over the following year and subtracted the actual inflation rate from the return that the bond yielded to come up with the “real rate of return” or the rate of return after inflation.
Obviously, the bonds didn’t do well during a period of deflation but during most periods the return was at least positive although there were 8 periods where the return was negative i.e. the inflation indexed bonds returned less than the inflation rate.
Note: we do not have final return information for the most recent two periods because we don’t know what the annual inflation rate will be.
| Date | Semi-Annual Inflation Rate Adjustment | Fixed Rate | Bond Total Return | Annual Inflation Rate | Bond Real Return |
| Nov 2012 | 0.88% | 0.00% | 1.76% | ||
| May 2012 | 1.10% | 0.00% | 2.20% | ||
| Nov 2011 | 1.53% | 0.00% | 3.06% | 2.16% | 0.9% |
| May 2011 | 2.30% | 0.00% | 4.60% | 2.30% | 2.3% |
| Nov 2010 | 0.37% | 0.00% | 0.74% | 3.53% | -2.8% |
| May 2010 | 0.77% | 0.20% | 1.74% | 3.16% | -1.4% |
| Nov 2009 | 1.53% | 0.30% | 3.36% | 1.17% | 2.2% |
| May 2009 | -2.78% | 0.10% | -5.46% | 2.24% | -7.7% |
| Nov 2008 | 2.46% | 0.70% | 5.64% | -0.18% | 5.8% |
| May 2008 | 2.42% | 0.00% | 4.84% | -0.74% | 5.6% |
| Nov 2007 | 1.53% | 1.20% | 4.28% | 3.66% | 0.6% |
| May 2007 | 1.21% | 1.30% | 3.74% | 3.94% | -0.2% |
| Nov 2006 | 1.55% | 1.40% | 4.52% | 3.54% | 1.0% |
| May 2006 | 0.50% | 1.40% | 2.41% | 2.57% | -0.2% |
| Nov 2005 | 2.85% | 1.00% | 6.73% | 1.31% | 5.4% |
| May 2005 | 1.79% | 1.20% | 4.80% | 3.55% | 1.3% |
| Nov 2004 | 1.33% | 1.00% | 3.67% | 4.35% | -0.7% |
| May 2004 | 1.19% | 1.00% | 3.39% | 3.51% | -0.1% |
| Nov 2003 | 0.54% | 1.10% | 2.19% | 3.19% | -1.0% |
| May 2003 | 1.77% | 1.10% | 4.66% | 2.29% | 2.4% |
| Nov 2002 | 1.23% | 1.60% | 4.08% | 2.04% | 2.0% |
| May 2002 | 0.28% | 2.00% | 2.57% | 2.22% | 0.3% |
| Nov 2001 | 1.19% | 2.00% | 4.40% | 2.03% | 2.4% |
| May 2001 | 1.44% | 3.00% | 5.92% | 1.64% | 4.3% |
| Nov 2000 | 1.52% | 3.40% | 6.49% | 2.13% | 4.4% |
| May 2000 | 1.91% | 3.60% | 7.49% | 3.27% | 4.2% |
| Nov 1999 | 1.76% | 3.40% | 6.98% | 3.45% | 3.5% |
| May 1999 | 0.86% | 3.30% | 5.05% | 3.07% | 2.0% |
| Nov 1998 | 0.86% | 3.30% | 5.05% | 2.56% | 2.5% |
See Other Inflation Adjusted Prices:
- Historical Oil Prices Chart
- Annual Average Oil Prices in Table Form
- Inflation Adjusted Electricity Prices
- Inflation Adjusted Gasoline Prices
- Inflation Adjusted NYSE Stock Index
- Inflation Adjusted Price of Corn
- Inflation Adjusted College Education Costs
See Also:
- What to Do When – Not If – Inflation Gets Out of Hand
- What are I bonds?
- What is Quantitative Easing?
- Its Weight in Gold: The Real Prices of Things
As a fixed income fund manager I was chosen to run the first inflation-linked bond fund. This was before they (the U.S. Treasury under Rubin) even decided the best way to add inflation onto the return of the securities. They made me (and folks from PIMCO and Brown Brothers) believe we had a lot of say. As TIAA-CREF we promised to support the new security and out official position is that they are the perfect vehicle for investors. So my background is on the conservative side of investing. I now am the Content Manager for Channelchek.com where we post research and articles on small and microcap stocks. It took a while for me to understand where such “risky” investments fit in the mix. At the moment the downside risk seems far more certain and imminent for those in straight bond funds. Well-chosen small companies may fall apart, but bonds will fall apart. That’s a long intro to say: I enjoyed every word of your article: Using Risk to Combat Inflation